One of America’s top retailers, Costco, made a quite confirmation about the increase in membership prices. The retailer always tries its best not to increase prices, because the retailer is always considering the impact on consumers. The retail giant recently celebrated its fan favourite $1.50 hot dog combo’s 40 years of existence. However, it has been stated that the retailer increased the membership fees because it does not want to increase product prices.
Costco increased the membership fee prices
As mentioned, the retailer celebrated 40 years of its fan favourite hot dog and soda combo. For these 40 years, this combo remained at the same price, $1.50. The retailer stated that the price of this combo will never change. Therefore, the retailer shared some strategies on how the price of the combo remains the same in the September edition of its Costco Connections magazine.
In the magazine it was shared that “To keep that price, Costco sources the quarter-pound-plus beef franks from two in-house meat plants. The hot dog is served on a gourmet bun sourced from regional suppliers, and six soda flavors are bought in bulk, allowing Costco to control pricing and reduce product waste.” A similar thing happened with Costco’s $4.99 rotisserie chicken. The company pledged to keep that price and even bought its own chicken farm to be able to do that.
In reality, the hot dog deal and the rotisserie chicken likely serve as loss leaders. This means that these are the products that draw people to the store, and those consumers purchase a lot more than a cheap meal once they are there. It had been stated that Costco’s membership fees have been driving the company.
One cannot downplay the impact membership fees have on the company. According to The Motley Fool’s Dan Caplinger, “Costco’s profits in fiscal 2023 amounted to $6.29 billion. As it turns out, though, $4.58 billion of that profit — 73% of the total — had nothing to do with product sales. That money came from the membership fees that customers pay just to enter Costco’s retail warehouse locations.” Below is an overview of how Costco’s membership price increased:
- Effective September 1, 2024: First increase in seven years.
- Gold Star/Business: Increased from $60 to $65 (+8%).
- Executive: It increased from $120 to $130 (+8%).
- Executive 2% reward cap: Increased from $1,000 to $1,250
- Impact: 52M members in United States and Canada.
- Financial boost: +$290M to operating income.
The responses of consumers
For about two years before the retailer decided to raise its membership fee prices, members and media were speculating that the chain was going to make that move. The long delay from the normal cycle appears to have dulled the blow from the increase.
According to Chief Financial Officer (CFO) Gary Millerchip, “I think as we shared before, we really haven’t heard a lot of member feedback. I think the fact we waited seven years to increase the fee when we typically would do it in five. And so, there was a level of understanding it may be coming.” He made this statement during a retailer’s third-quarter earnings call.
Millerchip believes that the retailer builds goodwill in many different ways. He added that the retailer held unto the prices of the hot dog combo deal and the rotisserie chicken, even in different time of the high inflation rates. He alluded to the fact that all signs thus far look positive.
In addition, Millerchip stated that “Overall, on membership, I’d say we’re very pleased with the metrics. We tend to look at it across renewal rates, continued sign-up activity overall and then is the membership count and the income growing. And when we look at those three metrics, we’re pleased with the overall direction that we’re seeing in all of those metrics.”
Expects’ view on the impact of the price increase
Neil Saunders, the GlobalData Managing Director shared his views on the retailer’s membership increase on RetailWire. He stated that “Costco membership fees have been frozen since 2017. If they had risen with inflation, the basic membership would now be just over $77. So, in this context, a rise to $65 isn’t too bad. That said, no one will leap for joy at the increase – but the real question is will members tolerate it? The answer, for the large majority, is yes. Why? Because Costco’s all round value proposition is very strong, and loyalty is high.”
Another member of RetailWire’s Brain Trust, William Passodelis, believes that the economy provides Costco with some cover to make this move. He writes that, “As usual, Neil’s views above are RIGHT! Costco’s value proposition is such a huge driver for it that I believe members will tolerate the slight increase. Also, with EVERYTHING under the sun increasing in price, I think the members will not be surprised, and I think this is a good time for Costco to make the move.”